In its first bilateral review of the Chinese economy since 2006, the IMF executive board also praised Beijing's massive efforts to bolster the economy amid the worst global contraction since the Great Depression.

The board "welcomed the important progress made in the past few years in increasing the market's role in determining the exchange rate, as well as the consequent substantial real appreciation that has been achieved since the exchange rate reform in 2005," the multilateral institution said.

"Some directors nevertheless supported the view that the renminbi remains substantially undervalued," the board noted.

Since the middle of 2008, the yuan's nominal exchange rate appreciation against the US dollar "has stopped although the nominal effective exchange rate has appreciated 5.0 percent," it said. Real appreciation in the 12 months to May was estimated at 5.0 percent.

The statement on the conclusion of the so-called Article IV bilateral consultation with China on July 8 signaled an improvement in strained relations between the Washington-based IMF and the Asian powerhouse, which wants more clout in the institution to reflect its rising economic might.

The Chinese authorities had disagreed sharply with the IMF's October 2006 report, which found China's yuan, or renminbi, currency was misaligned with the country's economic fundamentals.

The required Article IV consultations with member countries usually occur annually. A summary of the board's views is presented to the country's government and the public statement represents a summary of most of the board's discussions.

The IMF board said the staff report for the consultation with China "may be made available at a later stage if the authorities consent."

The 24-member executive board, chaired by IMF managing director Dominique Strauss-Kahn, includes directors representing the US, China, Japan, Germany, France, Britain, Russia and Saudi Arabia. The remaining 16 directors represent groups of countries in the 186-member IMF.

The United States, the largest IMF stakeholder, and European countries have pressed China to allow the yuan to appreciate, accusing Beijing of keeping it artificially low to protect its crucial export sector.

Cheaper Chinese products have flooded into the US, building a gargantuan, politically sensitive trade surplus. The US trade gap with China, the country's second-largest trading partner, widened to 17.5 billion dollars in May.

The latest IMF board assessment on China's economy comes ahead of next week's first US-China high-level strategic and economic talks under President Barack Obama's administration.

IMF directors were divided over the role of the currency in China's rebalancing of its economy to reduce its dependence on exports, a reorientation long advocated by the financial institution.

"Looking ahead, many directors considered that a further strengthening of the renminbi would be part of a comprehensive strategy to rebalance the economy by increasing the purchasing power of households and the labor share of income, and reorienting investment toward non-tradable sectors," the statement said.

But "a number of other directors" pointed to the difficulties of making exchange rate assessments.

"These directors generally considered that exchange rate appreciation would only play a supplementary role in supporting reforms to reorient the Chinese economy and should be pursued in a gradual manner, as and when conditions permit," the board said.

The IMF directors praised Beijing's "rapid and vigorous policy response in both the fiscal and monetary policy areas" in the face of the global crisis, and called for more reforms to rebalance the country's economic growth.

"This response has served to mitigate the economic downturn and facilitate an economic recovery during the course of this year and into 2010 and has contributed to broader global stability," the board said.

The IMF projects the Chinese economy will grow 7.5 percent in 2009, after a 9.0 percent pace in 2008, and then accelerate to 8.5 percent in 2010.